Construction, building, maintenance contracts, etc are works Contract and which are considered to services:
““Works Contract is given under Section 2 (119) which provides,
“Works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract””
Interpretations from section 2(119):
Therefore the definition of works contract encompasses 12 types of contracts in respect of any immovable property:
Under-construction shall be Services and land not taxable:
““Clause 5(b) of Second Schedule which provides following shall be shall be supply of services, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier””
Explanation.—For the purposes of this clause—
(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force……..;
(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure” ”
““Clause 5 of Third Schedule which provides,
Sale of land, subject to clause (b) of paragraph 5 of Schedule II, and sale of building, shall neither be a goods or services””
Interpretations from combined reading of both clauses:
Therefore, contracts for construction, building, modification, installation of immovable property (building, civil structure, railways, bridge, roads, etc) shall be considered to be services.
Since, transfer of inputs/ capital equipments from one site to another is quite common in this sector. Therefore, construction companies operating from multiple locations in different states, then it would require to pay GST on stock/ Assets transfers from its premises in one state to its premises in another state. Further, in case construction companies are having multiple business verticals within the state and if a construction companies opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same state.
Multiple Registrations by way of casual taxable person:
Concept of centralized registration for all the projects will end and construction companies having a site in multiple States would required to obtain registration in each State from where the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value. Registrations can be obtained permanently or temporarily as casual taxable person.
Input Service Distributor:
Section 2(61), is a Input Service Distributor (ISD) is an office of supplier which receives tax invoice towards receipts of input services and distributes the credit of CGST/SGST to its own ‘recipient office of credit’ who is the supplier under the same PAN as that of ISD.
Transitional provisions in respect of Input Credits:
However, if the credit of VAT is being currently availed then the same needs to be properly reflected in the last VAT return to transfer such credits to the GST regime.
Section 169 relating to transitional credit on stocks also provides for deemed credit at rates to be prescribed in the absence of duty/ tax paying documents.
Appointed date means that on which provisions of GST act shall come into effect. Most probably 1st July, 2017.
Transitional provisions in respect of provision of services or receipt of payment post GST:
Returns under GST:
Returns under GST shall be as under:
|Return Type||Due Date|
|Outward supplies||10th of the next month|
|Inward supplies||15th of the next month|
|Monthly return (other than compounding taxpayer and ISD)||20th of the next month|
|Quarterly return for compounding Tax Payer||18th of the month next to Quarter|
|Periodic return by Non-Resident Foreign Taxpayer||Last day of Registration|
|Input Service Distributor (ISD)||15th of the next month|
|Tax Deducted at Source(TDS) Payment and Return||10th of the next month|
|Payment of Tax||20th of the next month|
|Annual Return||31st December of next FY|
Meaning of Place of supply and tax chargeability:
Relevancy of place of supply provision is that the tax goes to the state where the services are consumed.
Place of supply in case of immovable property shall be the location of immovable property.
As per section 12(3)(a) and section 13(4), services directly in relation to an immovable property, including…..….and ancillary to construction contract shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.
Tax Chargeability in respect to immovable property:
Concept of Casual taxable person, section 2(20):
“casual taxable person” means a person who occasionally undertakes contracts in a State or a Union territory where he has no fixed place of business;
Example: Shiva takes a contract for construction immovable property. Shiva has business in Delhi but immovable property shall be in Mumbai. Shiva has also sub contracted a work. Determine which tax shiva shall charge and whether input credit shall be available to for sub contract. What would be the position if invoice are received at central office being in Delhi registered as ISD.
In this case shiva even though had the premises in Delhi, shall have to register as a casual taxable person in Mumbai. Once he is registered, his location and place of supply shall be in same state. Therefore he shall charge CGST & SGST and on the same lines his sub contractor shall charge CGST & SGST which is available as credit to shiva.
If there would have been a central office registered as ISD, then the sub works contractor bills as IGST and this IGST shall be distributed to Mumbai office, who shall claim it as setoff against CGST & SGST.
Meaning of Point of Taxation:
Time of supply of goods determines time, when the tax (GST) will be levied. GST is levied on supply whether goods or services. Now, let us take example of supply of service. In a service contract various events are involved i.e. invoice issuance, payment receipt, rendering of services, etc. Now when will be the tax levied on this service contract whether at time of invoice issuance, receipt of payment, rendering of services?
Example: If it provided that tax shall be paid at time of receipt of advance, then if tax is paid later while the services is rendered, then there shall be liability to pay interest.
Impact of it in respect of immovable property would be that, generally the real estate companies pays tax on receipt basis, however GST requires timely payment based on the earlier of the events. Further, most of the immovable property contracts falls under Continuous supply of services.
Earlier of the following, section 13(2):
1. Where invoice issued within prescribed time, date of issue of invoice or receipt of payment whichever is earlier;
2. Where it invoice not issued within prescribed time, date of provision of service or receipt of payment whichever is earlier;
3. Date on which the recipient shows provision of services in his books of accounts where above 2 doesn’t apply.
Continuous supply of services
Section 31(5) “continuous supply of services” means a supply of services continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations.
Section 31(5) prescribes period for issue of invoice in Continuous supply of services:
1. Where due date of payment is ascertainable from contract, invoice shall be issued on or before that due date;
2. Where due date of payment is not ascertainable from contract, invoice shall be issued on or before receipt of payment.
3. Where the payment is linked to completion of event, invoice shall be issued on or before such completion.
Shiva entered into contract for construction of a immovable property. The terms of the contract are as under. Therefore taxable amount shall be:
|Advance to pay on 01.01.2018||Rs.5 lacs||Rs.5 lacs|
|On 30 percent completion 01.03.2018||Rs.8 lacs(cumulatively)||Rs.3 lacs|
|Invoice issues on 01.06.2018 for full value||Rs.20lacs(total)||Rs.12 lacs|
|Entire Consideration payable on 01.07.2018||Rs20 lacs(total)||N.A.|
Section 17(5)(c) & 17(5)(d) provides input tax credit shall not be available where:
Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Section 16(2) provides conditions for availing credit:
In a contract for sale of a building along with land, shiva has obtained following goods and services:
|Pure labour charges||2 lacs|
|Sub contracted to other supplier||2 lacs|
|Value of land||3 lacs|
The property was located at Mumbai. The supplier has establishment at Delhi. The contract provided for payment of advance for Rs.5lacs on 01.02.2018. Further, a invoice amounting Rs.7 lacs was issued basis of continuing service contract terms. on 01.04.2018. Supplier for sub contract has paid the tax on 31.05.2018 to government. The property construction was completed on 01.07.2018. The above property was sold for Rs.20 lacs.
Compute the tax payable, due date of payments, credit admissible and credit denied. Assume tax rates to be 18% for services and 12% for goods. Also state nature of tax(whether IGST or SGST/CGST).
What would be your answer had the whole consideration was paid on 02.08.2018 i.e. after receipt of completion certificate.
|Tax Credit Admissible||Sub Contract*Tax Rate||200000*18%=Rs.36K|
|Tax Credit denied||((Value of material*Tax rate) + (Value of Services*Tax rate))||(500000*12%)+(200000*18%)= Rs.96K
|Total Tax Payable||((Sell price-value of land)*Services tax rate)-Tax Credit Admissible||((2000000-300000)*18%)-36000= Rs.2.70 lacs|
|Tax payment dates||Date of Advance tax receipt 01.02.2018||500000*18%=Rs.90K|
|Date of Invoice issuance less amount on which already paid 01.04.2018||(700000- 500000)*18%=Rs.36K|
|Date of completion for remaining amount||((2000000-700000-300000)*18%)-36000=Rs.1.44 lacs|
There has been non allow ability of credits to the tune of Rs.96K. Tax payable in this contract is 17 lacs*18%=3.06 lacs plus 96k, the credit of which was denied therefore total tax payable is 4.02 lacs.
Therefore, total tax burden has been 4.02/20 lacs which equals 20.10%. Moreover, there is additional implication of stamp duty also.
If the entire consideration was received after completion certificate, there shall be no applicability of GST. No GST shall be payable in that case.
(Author Shivashish Karnani is a CA and can be reach out freely at firstname.lastname@example.org and on +91-9818472772)
Disclaimer- No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish Kumar. The information provided is not a substitute for legal and other professional advice where the facts and circumstances warrant.